SPX Through 10 July 2009

Put Call Ratio 10 July 2009 with OEX

The equity-only put-call ratios continue to rise and are thus still on sell signals. Since they started from such a low point on their charts, they have a long way to roam on the upside before we would consider them “oversold.”

Weighted Put Call Ratio with OEX

Market breadth turned decidedly negative in the last week, as the market sold off, but have now reached oversold status. However, “oversold” does not mean “buy.” So until these generate true buy signals — which they would do with one more day of advances leading declines — we consider them as still being on sell signals.

VIX with Trend Line 7-10-09

In summary, the bulls may attempt a rally here, but we would not expect it to be particularly robust — probably just enough to work off the oversold condition in the breadth oscillators. Thereafter, unless the indicators quickly change, we expect a downside breakout to occur.

Here’s how we look (bottom chart) in the S&P 500 e-mini (ES) contract going into the 7:30 AM CT jobless claim numbers. Note the resistance between 912 and 914, as we continue in a short-term downtrend mode. If the 7:30 AM number cannot move us above that resistance level, I’ll be looking for a test of Wednesday’s lows below 900. Note that we’ll have a few opportunities to move this morning, with Treasury Secretary Geithner talking at 8:30 AM CT and Leading Economic Indicators and Philadelphia Fed reports at 9 AM CT.

I find it worth tracking interest rates and the dollar in response to these releases and events and correlating those moves to stocks to pick up on emerging and continuing intermarket themes. In general, if the numbers cannot move us out of a value range that was established up to that point, I assume that the trend that has been in place will remain intact. Once again, I’ll be tracking all of this intraday via Twitter (follow the tweets here).

8:15 AM CT – Update: We traded higher on the jobless claim numbers, but have stayed firmly within the overnight range. Note in the middle Market Delta chart that we’re now trading above the day’s volume-weighted average price (VWAP; red line), as the dollar has weakened versus the euro and 10-year rates have bumped higher. I’ll be watching to see how we trade around VWAP to handicap the odds of taking out Wednesday’s lows in early morning trade vs stay within the overnight range trade.

10:24 AM CT – I’ve added a fresh Market Delta chart (top) to show how we’ve been accepting value above the VWAP (red line) and around the 914/915 ES resistance. This raises the odds that, rather than trap bulls, we’ll flush out bears by taking the market above that resistance. I’m watching TICK and intermarket themes (weak dollar, strong 10-year rates) to see if that scenario unfolds.
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So after all the fuss about Leveraged ETF’s causing their own late day melt downs and melt ups, is there any evidence it actually happens? I mean stocks have closed low and last or high and last forever. Has that pattern of accelerated as leveraged ETF’s gained popularity?

Just to refresh, the concept is that Third parties create these ETF’s for Direxion and ProShares, and those Third parties need to rebalance at some point each day in the direction the ETF is moving. The thought being that this large natural player was piling onto moves already in progress, in addition to hedgies and traders fronting them.

Michael Stokes of MarketSciBlog thinks that there’s not much to see here.

Now I don’t know if traders are seeing a surge in volume near the close (because I don’t trade intraday), I don’t know if leveraged ETFs are responsible for today’s higher levels of market volatility, and I don’t know if leveraged ETFs add potential systemic risk should the market make a really big move up or down (a’la Oct. 1987).

But I do know that, leveraged ETFs are not pushing the market to close at intraday extremes with any more frequency than has been observed historically.

….A simple test. The graph (click thru to see) ….. shows a 1-year rolling average of the % of days that the SPY closed in either the top or bottom 20% of its intraday range (blue, left scale) and/or the top or bottom 10% (red, right scale), from early 1993.

From today, the market has closed in the top/ bottom fifth of its intraday range (blue) 52% of the time, and in the top/bottom tenth 30% of the time, over the last year. And while this is slightly more than the average over the entire test of 49% and 28%, it’s still very much in line with historical norms.

I do believe volume patterns have changed since the popularity of these pups have increased, but that may be sector specific. Financials for example now regularly see the biggest surge in the last few minutes, whereas formerly volume peaked near the open. But it’s interesting that a basic study of price performance shows relatively minor tweaks.

Bottom line I found playing around with this trade is that it only really worked well in the financial sector. That is, if you bought SKF or FAZ in the last hour on an already ugly day, you likely had good flip if you sold it out at the bell. But a combo of everyone in the world gaming this thing, and financials just not moving nearly as much these days, seems to have ended the play

One of the topics I’d like to cover in the summer seminar in Chicago is recognizing range vs. breakout trading conditions. The Market Delta chart above (click for detail) shows how we broke below the volume bulge mentioned in the intraday tweet (921-924) and found increased volume/participation as we broke the overnight lows and then broke below Monday’s low. It is the acceptance of price at lower levels that creates a shift in the market’s estimate of value. That acceptance, demonstrated by increased volume-at-price, is our best indication that the institutional traders/investors that move markets are participating in–indeed, leading–the weakness.

If we can get conference room space during market hours, perhaps we’ll be able to track some of these ideas in real time. More on the seminar to come…
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Several factors have contributed to my taking a more bearish stance today, including a VIX:VXX ratio of 0.92, up from a low of 0.919 a little earlier. A caveat about the VXX ETN. It is a note and not a fund so there is counterparty risk for the buyer of the note.

Among the ways to get long volatility in this environment of rapidly falling volatility is VXX, the short-term VIX ETN, which looks like an attractive long at the current at 74.79.